One Reason for the Decline in Soda Sales

What do you and your friends talk about when you drink your Cokes? Chances are it's not Coke.

A recent study by the Keller Fay Group shows that word-of-mouth impressions in face-to-face conversations are down across the board for the soft drink industry since 2011. The champions of the Coca-Cola Company (NYSE: KO) have fallen; Coca-Cola is down 6%-7%, Sprite down 10%, Diet Coke down 17%, and Coke Zero down 23%. PepsiCo (NYSE: PEP) didn't fare any better; Pepsi is down 9%, Mountain Dew down 8%, and Diet Pepsi down 26%. The Dr Pepper Snapple Group (NYSE: DPS) saw the same, with Dr Pepper down 15% and 7 Up down 14%.

The gossip coincides with sales. The soft drink industry saw a 3% decline in sales between 2012 and 2013, while suffering a 6% decline in WOM impressions. People are drinking less soda, and therefore talking about it less.

In fact, the only soft drink label to see any increase in discussion is, not coincidentally, the only soft drink to see an increase in sales over the last five years. The "Rudy" of the soda industry, Fanta (manufactured by Coca-Cola) is now 11% more popular in friendly chats than it was a few years ago. If I had to guess, I'd say most of those conversation are along the lines of, "Fanta? Is that still around?"

On a positive note, social media conversations are up 23% for the entire industry, 39% for Coke, and 31% for Pepsi. However, before you break out the bubbly for the fizzy, you should know that social media interactions only account for about 2% of the total WOM impressions. Face-to-face conversations make up 84%.

The most devastating blow came from the children. Teenagers have historically been the strongest pillar for the soft drink industry, with their love of sugar and penchant for doing the Dew. Yet, in the last three years, WOM has declined 23% among the 13-17 demographic. A similar blow was dealt by the Hispanic demographic, which saw a 26% decline.

The study, however, failed to address one of the biggest questions surrounding WOM publicity for sodas: How much could people possibly talk about Coke in the first place?

The other popular topic of discussion, Wal-Mart (NYSE: WMT) , failed to budge, and continues to dominate the discussions of the 45-69 demographic, African-Americans, and mothers.

You're only as good as your word

Word of mouth has long been considered nice, but not necessary. This kind of "free advertising" was thought to be nothing more than a fringe benefit, a result of good business practices elsewhere. But the study, "Quantifying the Role of Social Voice in Marketing Effectiveness," argues that WOM can be the cause of sales and success, not the consequence.

The study -- also conducted by the Kellar Fay Group, along with MarketShare -- states that "social voice," online and offline conversation about a brand, can affect sales consistently and to a measurable degree, plus directly increases the amount of online search activity. Moreover, social voice plays a significant role in marketing, comprising between 10%-54% of the total marketing impact for the cases studied.

Soft drinks go flatThis drop in word of mouth, then, is bad news at a time when the soda industry needs good news. According to The Wall Street Journal, the soft drink industry has been heading downhill for the last eight years, as the world's concern for health rises has led to a shift toward more water and energy drinks instead.

For an industry already in decline, the loss of WOM publicity is a Big Gulp to swallow. The shift did not go unnoticed by the soda companies -- almost all have expanded in recent years to include sports drinks and fruit juices in their repertoire.

But don't go playing the violin for Big Soda just yet. At present, soft drinks still make up around 25% of the entire U.S. beverage market, and revenues are still growing outside of the U.S. And while the amount of WOM may be declining, it still maintains a stable 70% positivity rating -- and still surpasses the word of mouth of alcohol, still drinks, sport/energy drinks, and coffee combined.

So, the soft drink industry still has a lot going for it. And Fanta's still around, too.

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Matt Ellis has no position in any stocks mentioned. The Motley Fool recommends Apple, Coca-Cola, and PepsiCo. The Motley Fool owns shares of Apple and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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